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Home prices are rising. Is this another bubble?
About 15 years after a housing bubble provoked the worst US financial disaster since the Great Depression, some observers express concern that the industry fell into another bubble.
House prices are rising despite the rise mortgage rates which, in theory, should restrict demand and lower prices.
The share of U.S. homeowners in serious financial distress, however, increased slightly at the start of this year compared with the final months of 2023, real estate data firm ATTOM found in a report this week.
Despite these trends, experts who spoke to ABC News largely dismissed fears of a housing bubble.
Exorbitant prices and the pressure they put on potential home buyers are a cause for concern, they said, but the price increases are due to an old-fashioned imbalance between supply and demand, not the frenzied speculation characteristic of a bubble.
“The price increases have been notable, but there are no abnormal factors driving them,” Lawrence Yun, chief economist at the National Association of Realtors, told ABC News. “It’s simply supply and demand – the normal ratio.”
Two years ago, the Federal Reserve began an aggressive series of interest rate increases in an effort to control inflation. Typically, such a policy would raise mortgage rates and lower home prices as buyers languish under high borrowing costs. In this case, mortgage rates soared, but prices soared along with them.
For nine consecutive months, existing home prices have risen year after year, according to data released by National Association of Realtors in March. Going back even further, the median price of an existing home has increased nearly 40% over the past four years, NAR data shows.
Home Prices Are RisingABC News, National Association of Realtors
“It’s a strange market that feels like an anomaly,” Marc Norman, associate dean of New York University’s School of Professional Studies and the Schack Institute of Real Estate, told ABC News. “I can certainly see people wondering if this is a bubble.”
The high prices, however, result from a simple example of too much money chasing too few homes, experts told ABC News.
During the Covid-19 pandemic, home construction slowed as a shortage of materials and workers made input costs more expensive, Norman said. As supply locks began to lift, the Fed raised interest rates, making it more expensive for developers to borrow the money needed to launch projects.
The slowdown in housing construction has contributed to the shortage of homes. Housing supply is 3.2 million homes short of what is needed to meet demand, real estate and investment company Hines said in a report last month.
“We don’t build enough homes in this country and there’s still a lot of demand,” Christopher Mayer, a real estate professor at Columbia University Business School, told ABC News. “Interest rates have made construction more expensive and homes have become more expensive.”
In this undated photo, a “For Sale” sign stands in front of a house. STOCK PHOTO/Getty Images
The current housing shortage stands in stark contrast to the housing bubble that led to the Great Recession, experts said.
At that time, a sharp rise in prices led to an increase in housing construction, which fueled an oversupply of housing. The abundance of homes, in turn, has led buyers to purchase a property – or multiple properties – as appreciation assets rather than places to live. When no new buyers could be found and the music stopped, prices plummeted.
Prices remain unusually high in the current market, but the housing shortage puts a limit on their decline, as a lack of options for buyers will continue to put upward pressure on prices, said Ken Johnson, a real estate economist at Florida Atlantic University. told ABC News.
“I don’t see a dramatic drop,” Johnson said, adding that he expects a scenario in the coming months in which home prices stabilize or fall slightly as they test the limits of consumers’ budgets. “On a scale of one to ten, with the last bubble being a nine, that’s a two or three.”
Still, Johnson said, potential interest rate cuts could further heat up the housing market, driving up prices and further threatening the sector’s stability.
On the other hand, Yun raised the possibility of a recession that forces layoffs and compromises homeowners’ ability to pay their mortgages, potentially flooding the market with homes. Even under those circumstances, he said, “the decline in home prices would be quite modest.”
Even in the absence of a full-blown bubble, the market could benefit from some deflation, Norman said.
“To me, the bigger problem than a bubble is just the lack of affordability,” he added. “Maybe the bubble doesn’t burst, but some air comes out of the balloon.”